Friday, June 1, 2012

Most frequently asked Location Advice questions

As frequenters to this blog, you know that I provide location advice to owners and occupants of industrial buildings in southern California. I recently considered the five most frequently asked questions that I receive as a commercial real estate professional. Part of my research involved polling several of my colleagues. I believe the questions and the responses are interesting...I hope you do as here goes. I will handle these ala David Letterman by discussing least to most.

Question number five: Can I make changes to the space and if so, who pays for it? Generally and it depends.

*Changes to a location...additional office, power upgrade, sprinkler retrofit, paint and carpet, moving walls, installing racks, distributing power, etc. can generally be accomplished subject to ownership approval and governmental approval with the proper permitting and code construction.

*Changes to the square footage (IE: adding a structural mezzanine), changes to the common area, fencing required parking spaces, creating windows in bearing walls...not so easy.

*Changes are typically paid for in one of three ways: the owner pays for all of the cost and concedes the cost (rare), the occupant pays for all of the cost (even rarer), or some combination of the two. This combination could be an owner paying for the refurbishment of the space...paint, carpet, and cleanup...and conceding the cost and paying for the cost of a sprinkler retrofit and amortizing the cost over the term of the lease.

*The "acid test" of who pays depends upon the owner's ability to pay, the owner's motivation, the general or specific nature of the improvements (think future marketability) and the market (is the competition delivering space to the market completely refurbished). Sometimes an owner will be willing to compensate a tenant in the form of free or half rent to offset the cost of changes.

Question number four: How do you get paid? The owner of the property pays us.

*A common misconception is that the fee adds to the purchase price or lease rate. The reality is that an engaged location advisor can achieve a much higher purchase price than the typical owner because of market knowledge and experience. On the occupant side, an experienced location advisor can negotiate a better lease rate and concession package because of our knowledge of comparables, availabilities, motivation and our expertise. The net result is a better deal for both parties. Our system for insuring the best deal is outlined in a previous post. You can read the post by clicking here.

Question number three: How long have you done this? Since 1984.

* Real estate content (comps, avails, absorption, current pricing) is the same but the method of delivery is different. Who would have foreseen in 1984 that I would be blogging and forwarding location advice electronically in 2012...prior to fax machines and the world wide web! Or, that we could survey inventory of available our car...or at the beach...and send a list with images to our clients with the click of a button. Or, that we could send a real time...of the property...unbelievable!

Question number two: How much is my building worth? That depends on a number of factors.

*We consider the market...up trending or down trending, comparables and availabilities. If the market is up trending, chances are your building is worth more than the comps suggest. If the market is down trending, you might be best served to price lower than the recent comps and preempt a long marketing cycle. Marketing time plays a role. How long can you afford to market the building?...a fire sale motivation will cause the building to be worth less. Does the building have special amenities...excess or surplus land, excess power, fenced yard, freezer/cooler space, special AQMD permits, etc. For the right buyer or tenant, these amenities can add to the price.

Question number one: How is the market? Weird.

*In southern California, the market has sufficiently rebounded to cause shortages in certain product types...100,000 + warehouse distribution buildings as an example. We are seeing some price appreciation as well. The occupant's mindset is that we are still in 2009 and the opposite is true. Our market is healthier than most admit. We have occupants in the market believing that motivation is still at 2009 levels and owners who believe the market has rebounded and that they should hold firm. Not a great dynamic for deal making. Another thing that has changed dramatically is the amount of regulatory approvals necessary to make a move. A recent 20,000 sf transaction was reviewed by seven governmental agencies before approval could be achieved. Wow!

Did I leave any out? Please comment below with your question and I will promptly respond.